Trading Systems and Money Management : A Guide to Trading and Profiting in Any Market

to 0.81. Tables 28.6 and 28.7 can be compared to Tables 13.5, 19.1, and 20.5,

which show the result during the development of the system.

Comparing the numbers in Tables 28.6 and 28.7 and Figures 28.5 and 28.6

with the numbers for the strategies we’ve already looked at, it’s apparent that this

strategy is not as good as the previous two. For one thing, both the average annu-

al return and the profit factor are the lowest, while the maximum drawdown is the

highest so far. To achieve these numbers, we also have to risk more, especially in

the NASDAQ stocks. Together with the lower Sharpe ratio, this indicates that

we’re not getting as much bang for the buck as with the other strategies.

However, the fact that we can risk more on the NASDAQ stocks to maximize

the Sharpe ratio also indicates that the system is relatively safe to trade on these

markets. Remember that the optimal f, when optimizing the equity growth, is an

indication of how large we can allow our largest loser to be while still ending up

at the highest possible equity level.

Nonetheless, the strategy has not coped well with the latest bear market and

is currently in its worst drawdown, at close to 30 percent. This fact, combined with

a longest flat time of 23 months, is bad enough to discourage many professional

traders and money managers to trade this strategy as is. Thus, it doesn’t matter that

the strategy has done much better than a buy-and-hold strategy on any of the mar-

ket indexes. (Don’t forget to compare the strategy results for all strategies with the

numbers in Table 28.1.)

To trade this strategy, we need to either come up with a way to trade it on the

short side as well, or combine it with another short-selling strategy. This new strat-

egy should then be able to deliver a higher risk-adjusted return (the Sharpe ratio)

to a lower risk per trade, to make trading it worthwhile when compared to the

Meander strategies.

STRATEGY 4

 Long-term filter: RS system No. 1


 Short-term systems: The trailing-stop version of the volume-weighted aver-

age system


 Markets: 30 NASDAQ stocks for a total of 30 symacs

Just to show you what you can do with the spreadsheet used for these calculations

and how the results can vary with the risk per trade, I traded the trailing-stop ver-

sion of the volume-weighted average system on the NASDAQ stocks only, setting

the fictive risk to 50 percent.

Table 28.8 shows that the average annual return equals 32.5 percent, but also

that the largest drawdown, which actually happened in early 2000, surpasses 40

percent (see also Figure 28.7). Interestingly, despite the high risk per trade, the

Sharpe ratio still comes out to 0.76, which isn’t too bad. Another indication that

354 PART 4 Money Management